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RYAN'S FAMILY STEAK HOUSES, INC.
CONFERENCE CALL FOR APRIL 23, 2003 @ 4 P.M. EDT
CHAIRPERSON: FRED GRANT
Operator:
Good afternoon and welcome to the Ryan's First Quarter
Earnings Conference Call for April 23rd, 2003. Your host
for today will be Fred Grant. Please go ahead, Sir.
Fred Grant:
Thank you very much and good afternoon everybody and I hope
you are having a beautiful day. We're having a beautiful
day down here in South Carolina today and we are especially
glad we're having nice days, given the weather that we had
during the first quarter. It was absolutely miserable
during January and February. If you have followed our sales
at all, you know that it affected us and you know, we are
looking forward to some days with decent weather. And you
know, hopefully people have gotten a little - I think they
have gotten tired of watching the war on TV at night and
we're just glad to be in some hopefully period of normalcy
here as we go forward.
The format for today's call will be very similar. I will
talk about the financial results and talk about some
strategic things that we're doing at the same time. After
that, we'll have a Q&A session and I'm joined here by
Charlie Way, our President and CEO, and Ed McCrainie (ph),
our Executive Vice President, and they'll be available for
questions and we'll try to answer your questions as well as
we can.
So, let's start talking about the quarter and you know,
really from an overview standpoint, it was a - obviously a
tough sales period and when you start looking at barely
significant drops and same store sales that we had - same
store sales are down 4.2% for the quarter versus 1.7
increase last year. When you have that happen, a lot of
costs are affected - you know, the fixed components of those
costs are affected, so your cost of sales almost invariably
goes up and you end up with margin issues.
And on top of that, we had some fairly significant utility
increases as many people have and you know, we're still
fairly fortunate that we could stay flat for the quarter,
given the situation.
Again, from a sales standpoint, we - January and February
were very difficult from a weather standpoint. And I was
actually trying to think how to quantify that and you know,
it's just very difficult. The best way to do it is really
talk about some comparisons, I guess, and you know, to say
comparisons about where things have been and you know, did
you have periods where the weather didn't get you in. And
when we released the March sales release, the first two
weeks of March were fairly normal from a weather standpoint
everything and we were down about 1.2% at that point. And
then, actually then the war hit and we had a significant
drop again and that last two weeks.
But, you know, you think about that 1.2% being down for the
first two weeks in March and we were down roughly about
4.4%, I guess, for January and February. So, you know,
there is no question that the weather had a big hit for us
right there.
Just looking forward, currently we have been about flat for
the - just a little bit under flat for the first couple of
weeks in April and from - on a same store sales basis, and
so, when you put all that together, I think it kind of puts
in line kind of what happened during the quarter from a
weather standpoint and then from the war standpoint. And I
will remind everybody of course that two weeks does not make
a trend and - but, we are seeing some better results these
first couple of weeks in April right here.
From - other things from a sales standpoint, we have been
putting out display conversions. One of the things we've
talked about is doing more exterior remodeling and we are
tracking that. So far - and this won't be very specific,
but you'll understand why. I mean, as of today, we only
have seven of those conversions in place and there is
actually a fair range of different types of conversions
whether we just do the outside. We go back on display and
do the outside. In some areas where we've - where we feel
we need to - we actually changed the name of the concept to
Fire Mountain to kind of have a fresh start sand then we've
done other exterior conversions with the Ryan's name. And
obviously, with seven of them in place today, there is just
not a critical mass to really start talking to the
investment community. I'd hate to talk about results and
have you start plugging in models where we don't have enough
critical mass.
Let me say this though. In general, we are very pleased
with the results. It's preliminary. We need more. We have
a fair amount coming into - on board for the rest of the
year. We're hoping to do around 30 conversions, I guess, 30
to 40 during the year. And certainly, as we proceed during
the year, we'll have a very good feel for this whole thing.
The idea, as we said in the press release, as we said before
on doing the exterior modeling is that - it's like almost
like a virtual billboard for customers, potential customers.
That's who we are trying to reach. Before we do the display
cooking on the inside, the outside wouldn't change. Our
existing customers might know about it, but we need to get
new potential customers in there also. And people are
attracted to shiny new buildings. We see it all the time
and you can probably think about your own, you know,
personal circumstances being the same way.
So, when we do the outside of the building, it takes on a
whole new look. It's - they've done an excellent job on
these conversions and you know, we feel good about it going
forward. But we need more of a critical mass, so we can,
you know, start spouting off what the results are. But, we
are pleased with it and optimistic at this point.
I think from a - I guess at this point, go into the
expenses. Food and beverage, it's down 130 basis points.
It really had some beneficial commodity costs, pork,
seafood, poultry. Lettuce is a lot lower than it was last
year. It's spiked up tremendously, I think in March last
year. And you know, it didn't do it this year. So, that's
great.
We did have a slight increase in beef costs during the
quarter, but it was nearly not a big factor. Because of
this lettuce mismatch, you know, we don't expect to see 130
basis point in decreases in food costs going forward.
However, we do expect to see somewhere in the, you know, 50
basis point range, you know, maybe a little more. So,
that's beneficial as we go forward. But, you know, it's
pretty amazing how these food costs are staying down, but
they certainly seem to be doing that at this point.
Payroll and benefits were up 90 basis point. A lot of that
had to do with the - a good hunk of it had to with just
having lower sales volumes. Hourly pay roll is up 33 basis
points. Manager pay roll is up 23 basis point. And that's
really just because of the lower average in its sales.
We did have some slightly higher benefit costs. Medical was
up a little bit and unemployment taxes went up and the
reason that is, is because the unemployment tax rates went
up. And, but of course, those also would be affected by the
lower average in its sales.
So really, overall, that whole - that whole line item was
affected by average in sales.
I need to just make a comment here and that's that when we
did the press release, we should have had a re-classing of
last year's pay roll and benefits number. And last year's
number should have been $58,674,00. And so - and the
difference, which I think is $348,000, was a re-class that
we should have picked up, but the amount is immaterial. I
think you'll agree obviously, when you take a look at the
entire PNL, but it does make that increase in pay roll and
benefits. It's not a 1.1% increase. It's about a .9%
increase, a 90 basis point increase. So, as you think about
the model, that's the way it should be. The offset amount
to that - the other operating expenses. And - well, the
amount there ought to be for last year - ought to be
$25,940. So, it's up 70 basis points and I think if you
look at your model, currently at 50 basis points.
So, it's immaterial, but I just want to make sure it's clear
as we're going forward. I don't intend to re-release the
press release for this. But, of course we'll have it right.
Depreciation was up 30 basis points. That's really because
of the lower average in its sales. It was impacted by
higher new store costs and you know, quite frankly, a good
number of the display conversions that we did last year.
But, that amount would go down if the sales were - obviously
would go down if the sales were where they ought to be.
Other operating expenses were up 70 basis points. About 43
basis points of it had to do with higher utility costs,
mostly gas, which was 30 basis points. And, you know, we'll
have another month or so of that. What's happened is that,
you know, we not only had more severe weather during this
year than last year, but of course there has been
significant rate increases. The vast significant portion of
our utilities are floating. A good note - I am hearing that
there is some relief down the road on that. And of course,
as we get into the spring and summer, we're not using this
much gas because we use that to keep the building.
So, that was a good hunk of it. And in addition, you know,
when you take a look at utilities, it is somewhat of a fixed
cost. You have to keep the building the same temperature
whether - regardless of how many sales you're doing. So,
there is impact there also.
You know, all the other items in there really were because
of - lower averaging sales. I guess that's not exactly
correct. Repairs and maintenance were up. That was because
of sales right there. There's no real issue with what we're
spending on repairs and maintenance. Just sales were down.
General liability insurance was up about 18 basis points,
but that's because we had some credits last year. And then,
our store closing costs, which we use in connection with
relocation, was down about 31 basis points and that was
because we could revalue some of the properties based on
higher than originally anticipated sales values.
So, but again, a lot of this is driven by the averaging
sales except of course the rate increases on the utilities.
But overall, margins were down 60 basis points and for the
reasons we just discussed.
G&A, mostly fixed costs. You know, again I hate to keep on
saying that averaging sales are going to impact that and it
did.
Interest expense was flat. We did have $10 million increase
in debt from last year due to a share repurchase program and
- - but the rates are still very favorable. Our average right
there in the quarter was 5.1% and that compared to 5.7% last
year. So, and really, I don't see any indication at this
point that rates are going up. I just do not - I mean, from
an observation standpoint, I don't see anything that's going
to drive them in the economy and in addition, you know, just
as we go out and get our liable (ph) rates and we keep up to
date on this, I just don't see any movement at all. In
fact, as of today, the one month liable rate was the same as
the six month liable rate, which you very rarely see. And
it just shows that there is really no momentum in the
economy at this point.
Franchise royalties were flat. Other income was down.
Basically, $192,000 - this is really due to several
miscellaneous items and you know, it's fairly small in the
big picture right here.
So, earnings before income taxes were obviously down about
almost 10%. We used the 36.2% tax rate in 2003 and we'll
continue to do that for the rest of the year. And net
earnings were down about $1.3 million. So, that's 60 basis
points just like the store margins.
So, it was a tough quarter. But what can I say? And the
story is and our goal is increasing sales and the main
drivers of it are the remodeling program that not only
involves display but also involves the exterior conversion.
We think it's a real plus also. We have rolled out
completely a very comprehensive local marketing program and
it gets the - our managers really involved the community.
There is exterior merchandising. You know, making sure
we're letting people know what's going on in the restaurant
both by signage and by activities in the community. And you
know, it's kind of early in that program. We've just rolled
it out during the first quarter and really gotten everybody
on board with it. But we heard a lot of - I guess anecdotal
talks stories at this point about how, you know, people -
they're seeing a lot more new customers in the restaurant.
So, we're optimistic about that and you know, I think we can
see some results on that. So, really, the two main drivers
are this local marketing program and the remodeling program
also.
From a share standpoint, we were down about 7% in average
weighted shared. Some portions of that has to do with how
you calculate diluted shares under the accounting rules and
having a lower stock price does impact that and get those
number shares down. However, we have continued to buy
shares with the share repurchase program. We bought just
under 700,000 shares in the first quarter and that's $7
million.
And if you're doing the math in your head, that comes about
to about a $10 price. Actually, the average price is about
10.17 during the quarter. And we intend to go forward with
that - with this program. Our plan right now is to do about
$25 million in total in share repurchases during the year
and you know, we intend to go forward. Our strategy hasn't
really changed about how we make that happen. We do it when
we think the price is very opportunistic and during February
and early March, we had a drop in the stock price down in
the low 10s and jumped on it and ended up buying 700,000
shares. So, we will continue doing that as we go forward.
So overall, because of that, our diluted average shares were
$0.28, which is the same as last year, and you know, it's a
tough quarter. We're looking forward to going ahead. We're
glad the weather is better, which I'm sure was a factor. I
think less people are watching the war on TV at this point
and also we're looking to see results from our - from the
local marketing program and from the conversion program that
we're doing right now.
So, that pretty much explains the quarter and I'll turn it
over to Vickie at this point, who will run the Q&A.
Operator:
Thank you. If there are any questions on the phone lines,
please press *1 on your touchtone phone. If you're using a
speakerphone, please pick up your handset and then press *1.
Please go ahead if you have any questions.
Your first question comes from Michael Corelli (ph). Please
go ahead.
Question:
Hi. Good afternoon.
Fred Grant:
Hello Michael.
Question:
Do you have any way of maybe quantifying the benefit April
of the Easter shift?
Fred Grant:
Well, I went through - let me tell you what I think it is
and this is, you know, somewhat subjective. But I looked at
what it was last year from, you know, what happened from the
week before Easter to the - Easter week, what kind of
increase we had and apply it to this year and compare it to
actual. And it's somewhere between, you know, $400,000 and
$500,000 of sales.
Question:
And what would that be on, you know, like a monthly sales
impact?
Fred Grant:
It's roughly 1250 a week and - about 2%.
Question:
Okay.
Fred Grant:
I think that's.
Question:
Yeah, that makes sense. Okay, thank you.
Fred Grant:
Yeah. The - it may be a little bit higher. It might be
between 2 and 4%. I just haven't figured it out.
Question:
Okay, thank you.
Operator:
Your next question comes from Joe Buckley. Please go ahead.
Question:
Thank you. I have a couple of questions.
Fred, the same stores sales update you gave us for April,
does that include Easter or was that.
Fred Grant:
Yeah, it included it. No, no, it did not. It did not.
Question:
Okay.
Fred Grant:
Cause that week is ending today.
Question:
Okay. Okay. So you're just a little bit below flat the
first two weeks and.
Fred Grant:
..yeah.
Question:
Easter was in the third week obviously.
Fred Grant:
Correct.
Question:
Okay. Question on the exterior remodel. Does it bump up
the cost of the remodels in a significant way and.
Fred Grant:
Yes, it does! You know, it takes a display conversion from
roughly 500,000 to 600,000.
Question:
Okay.
Fred Grant:
I'm sorry. That's about 400 to 6.
Question:
Okay. And do you plan to do the exterior looks for all of
the remodels this year? Is that the plan right now?
Fred Grant:
Yeah. I mean we're looking at them, but I got to tell you,
I mean, it appears - I mean that's what we want to do.
Question:
Okay. You said the Fire Mountain name? Talk a little bit
about that. You know, kind of the rationale and you know,
have you had greater impact when you changed the name then
if you kept the Ryan's name?
Fred Grant:
Not significantly, but you know, what happens - you know, I
think it depends on the areas sometimes. If there is too
much - where we think there has just been too much of an
issue with family steakhouses and let's face it: the Ryan's
name is linked to the family steakhouse, okay. I mean
obviously our legal name has Family Steakhouse in it, but we
don't put that on our restaurant signs. But just over the
years, it's just linked to family steakhouses.
And if we're in an area where we think there is just a real
issue with family steakhouses, you know we'll go and we can
change the name. Cause really the concept is different than
the old family steakhouse. It really - it's really much
different than the old family steakhouse concept.
Question:
How many units are you using the Fire Mountain name for now?
Fred Grant:
Yeah, hold on a minute. Yeah, it's four, Joe.
Question:
Okay, and one last question. The food cost outlook, do you
expect it to - stay roughly in this percentage of sales on a
sequential basis or what are you thinking on food costs
going forward?
Fred Grant:
It's going to get back to more of our traditional decreases.
Probably around the 50 to 75 basis points every quarter
going forward for the rest of year unless, you know,
something goes crazy. But that's what we'll project.
But sequentially, Joe, it's fairly close to this.
Question:
Okay, but you're down 50 to 75.
Fred Grant:
..exactly.
Question:
Okay, so that's down 50 to 75 year over year?
Fred Grant:
Yeah, I'm sorry. Yes, I thought..
Question:
Okay. Very good. Thank you.
Fred Grant:
You're welcome.
Operator:
Your next question comes from Steve Ballot (ph). Please go
ahead.
Question:
Back on the Fire Mountain name. What - you said if you were
in an area where family steakhouse is an issue, you would
change it to Fire Mountain?
Fred Grant:
Right.
Question:
I don't understand. What kind of area would that be an
issue and what kind of issue is that?
Fred Grant:
Well, I think there have obviously been a number of family
steakhouse chains around the country and our opinion, up in
the Midwest in particular because of the Ponderosa and
Bonanza brand, it's just hurt the family steakhouse concept
name. And the south is - certainly appears to be - it's
different, okay. There is just an affinity for southerners
of family steakhouses.
But, in the Midwest, we just thought there were issues there
and that's why we changed the name.
Does that make sense?
Question:
I guess. I'm not a restaurant - I don't have restaurant - a
lot of knowledge. What was the issue with Ponderosa?
Fred Grant:
Well, we - they just quite frankly didn't do a good -
haven't done a good job for a number of years. I mean, their
sales volume - I mean here is a good indicator. Their sales
volume average about a million per store, you know, and ours
average about 2.4 million, 2.5 million per store. They just
- - and they were heavy up in the Midwest and I guess some
degree in the northeast too with the Bonanza. They're the
same thing.
Question:
Okay.
Fred Grant:
And you know, there were just problems with them.
Question:
Okay, so they sort of poisoned the well in those areas.
Fred Grant:
Yeah, yeah. That's a good term. We'll use that in the
future.
Question:
But the Outback Steakhouse - those are successful, I think,
again I'm not a restaurant guy. Those are successful and
that's different cause they don't use the tag line "Family
Steakhouse".
Fred Grant:
Well, that's a different concept. Yeah, it's a different
concept. You know, their average tickets at least twice of
what ours is. They have three times full alcohol service.
It's really a lot different.
Their average check is about $22 to $25 a person and ours
is, you know, $7.
Question:
Okay. Great, thanks.
Operator:
Your next question comes from Richard Friary (ph). Please
go ahead.
Question:
Good afternoon. Is there anything further than what you
talked about in terms of managing costs and you know, new
concepts in putting up your store that you need to do to get
your same store sales back positive?
Fred Grant:
Well, I mean, if we knew what it was, we'd certainly do it.
We think these are the best things that we can do.
Question:
Do you have any idea for when you can get.
Fred Grant:
..we're not going to - I mean, let me just quell the - cause
this comes up a lot of times. I mean we don't serve
breakfast and we're not going to start doing that and we're
not going to start serving alcohol. But you know, these are
- - you know, we've seen good results from these. And there
is certainly - there are certainly significant changes in
the way we've done things over the years. We've done
remodeling, you know, for years. But it's always been on
the inside. So, we start changing the outside. That makes a
difference. You know, having a big local marketing program
is something we've never done either.
So, I think they're good substantial steps.
Question:
Alright. Thank you very much.
Operator:
Once again, if there are any questions, please press *1.
Your next question comes from Scott Doughty. Please go
ahead.
Question:
Good afternoon. I'm just curious. So, the four restaurants
that you changed the name and the exterior on the Fire
Mountain concept, have you done anything materially
different within the stores or, I mean, is it just basically
a converted drawing?
Fred Grant:
Well, I mean, it's a - it's certainly an updated interior
and it carries that lodge look from the outside into the
inside also. But, from a food standpoint, there are no
significant differences from our other display cooking
formats. But even because of that, people will come in and
say: "Golly! You've changed the food. You're doing better.
You're doing something different." And the fact of the
matter is we haven't. `
Unidentified Speaker:
We merchandise it better.
Fred Grant:
I'm sorry?
Unidentified Speaker:
We merchandise it a lot better.
Fred Grant:
Well, we merchandise it through the whole look of the
restaurant. Is that what you mean?
Unidentified Speaker:
It's merchandised a lot better through the new concept.
Fred Grant:
Yeah, well, I guess that's a good - yeah, that's true.
That's true. It's presented a lot better and but from the
food, the items of food, it's not significantly different at
all.
Question:
Okay. Thank you.
Operator:
There are no further questions.
Fred Grant:
Well, thank you very much everybody! We appreciate you
being on the call and you know, we're going to - sales are a
slump right now, but we've had them before and we've jumped
out of them. And when we jump out of them, we have same
store sales gains for extended periods of times. And that's
certainly the plan. So, we look forward to presenting
results to you in the future.
Thank you so much and have a good day!
Operator:
This concludes today's call. Please disconnect and have a
great day.